Standing Committee A

[Derek Conway in the Chair]

Companies (Audit, Investigations and Community Enterprise) Bill [Lords]

Motion made, and Question proposed, 
That, during the proceedings on the Companies (Audit, Investigations and Community Enterprise) Bill [Lords], the Standing Committee do meet on Tuesdays and Thursdays, when the House is sitting, at 8.55 am and 2.30 pm—[Jacqui Smith.]

Andrew Mitchell: I support the sittings motion. I draw the Committee's attention to my interests, which are clearly listed in the Register of Members' Interests. I am a director of Lazard's, and of a number of its subsidiaries. Lazard's is not a public company. I am also senior strategy adviser to Accenture. As we hope to deal with the question of auditor liability later this morning, I should point out that that company does no public audits of any kind.
 I thank the Minister for agreeing to a sittings motion. When I arrived today, no less than three and possibly four Government Whips were circling around the Room. I do not know whether that was because of the slightly different way in which we have programmed proceedings on the Bill, but there they were. We are considering the Bill in the old way, Mr. Conway—the way that was used many years ago, when you and I were Government Whips. We did not take a programme motion on the Floor of the House; in those days, such matters were agreed between the usual channels—the old style of procedure. The sittings motion is none the worse for that. 
 Question put and agreed to.

Derek Conway: Before we make progress, I remind the Committee that we have a money resolution and a Ways and Means resolution in connection with the Bill, copies of which are available in the Room. I also remind colleagues that adequate notice should be given of amendments. As a general rule, my co-Chairman and I do not intend to call starred amendments, including any starred amendments that may be reached during an afternoon sitting of the Committee.
 I also remind Members to switch off their mobile phones, especially as one of my co-Chairmen was once irritated by a phone ringing—until he discovered, to his horror, that it was his own. It is warm in the Room, so if any of my colleagues wish to do so, it is acceptable for them to remove their jackets.

Jacqui Smith: I beg to move,
That the order in which proceedings in Standing Committee on the Companies (Audit, Investigations and Community Enterprise) Bill [Lords] are to be taken shall be: New Clause 1; New Clause 3; Clauses 1 to 12, Schedule 1; Clauses 13 to 23; Schedule 2; Clauses 24 and 25; Schedule 3; Clause 26; Schedule 4; Clause 27; Schedule 5; Clauses 28 to 31; Schedule 6; Clauses 32 to 40; Schedule 7; Clauses 
41 to 62; Schedule 8; Clauses 63 to 65; remaining new Clauses; new Schedules; any other proceedings relating to the Bill.
 I start, Mr. Conway, by welcoming you to the Chair. This is the first time that I have had the honour to serve on a Committee under your chairmanship. I am also aware that we will have the services of my hon. Friend the Member for North-West Leicestershire (David Taylor) available to us during our debates. It would be difficult to find two better-qualified Chairmen. 
 I take this opportunity to welcome my hon. Friend the Member for West Bromwich, East (Mr. Watson) to the Committee. Despite the comments of the hon. Member for Sutton Coldfield (Mr. Mitchell), he has already dispensed with the services of the other Whips and taken up his new role as Whip for what I am sure will be an extremely successful first outing. He could not wish for a better start. 
 I do not believe that there is anything controversial about the order of consideration motion. The hon. Member for Sutton Coldfield made great play of the old way of doing things. I hope that what he and I thought was a sensible way of giving the Bill the appropriate scrutiny will find favour with the Committee. It seems sensible that we should look first at the new clauses dealing with directors, followed by the new clauses tabled by the hon. Gentleman on auditor liability, and then a detailed scrutiny of the remainder of the Bill. Those are important issues and they will be the subject of Government consultation; it is right that we should focus our attention on them this morning. 
 Although I am a fan of the new way of doing things, I have no doubt that, with the Committee's co-operation, we will make progress and give the Bill the scrutiny it deserves. That will enable us to deliver its objective of improving corporate governance and trust, and ensure the success of UK plc—an objective we all share.

Andrew Mitchell: I echo the Minister's comments in welcoming you, Mr. Conway, and the hon. Member for North-West Leicestershire to the Chair. This is the second Committee on which I have sat under your benign chairmanship, although the first considered a statutory instrument, so its proceedings were rather shorter than I anticipate ours being today.
 I also agree with what the Minister said about the aspirations for the Bill and with the order of consideration motion. I thank her for facilitating the Opposition's desire to consider the Bill in the way that has been proposed, which will, I hope, be agreed to. 
 Question put and agreed to.

New Clause 1 - Relaxation of prohibition on provisions protecting directors etc. from liability

'(1) After section 309 of the Companies Act 1985 (c.6) insert— 
 ''309A Provisions protecting directors from liability 
 (1) This section applies in relation to any liability attaching to a director of a company in connection with any negligence, default, breach of duty or breach of trust by him in relation to the company. 
 (2) Any provision which purports to exempt (to any extent) a director of a company from any liability within subsection (1) is void. 
 (3) Any provision by which a company directly or indirectly provides (to any extent) an indemnity for a director of— 
 (a) the company, or 
 (b) an associated company, 
 against any liability within subsection (1) is void 
 This is subject to subsections (4) and (5). 
 (4) Subsection (3) does not apply to a qualifying third party indemnity provision (see section 309B(1)). 
 (5) Subsection (3) does not prevent a company from purchasing and maintaining for a director of— 
 (a) the company, or 
 (b) an associated company, 
 insurance against any liability within subsection (1). 
 (6) In this section— 
 ''associated company'', in relation to a company (''C''), means a company which is C's subsidiary, or C's holding company or a subsidiary of C's holding company; 
 ''provision'' means a provision of any nature, whether or not it is contained in a company's articles or in any contract with a company. 
 309B Qualifying third party indemnity provisions 
 (1) For the purposes of section 309A(4) a provision is a qualifying third party indemnity provision if it is a provision such as is mentioned in section 309A(3) in relation to which conditions A to C below are satisfied. 
 (2) Condition A is that the provision does not provide any indemnity against any liability incurred by the director— 
 (a) to the company, or 
 (b) to any associated company. 
 (3) Condition B is that the provision does not provide any indemnity against any liability incurred by the director to pay— 
 (a) a fine imposed in criminal proceedings, or 
 (b) a sum payable to a regulatory authority by way of a penalty in respect of non-compliance with any requirement of a regulatory nature (however arising). 
 (4) Condition C is that the provision does not provide any indemnity against any liability incurred by the director— 
 (a) in defending any criminal proceedings in which he is convicted, or 
 (b) in defending any civil proceedings brought by the company, or an associated company, in which judgment is given against him, or 
 (c) in connection with any application under any of the following provisions in which the court refuses to grant him relief, namely— 
 (i) section 144(3) or (4) (acquisition of shares by innocent nominee), or 
 (ii) section 727 (general power to grant relief in case of honest and reasonable conduct). 
 (5) In paragraph (a), (b) or (c) of subsection (4) the reference to any such conviction, judgment or refusal of relief is a reference to one that has become final. 
 (6) For the purposes of subsection (5) a conviction, judgment or refusal of relief becomes final— 
 (a) if not appealed against, at the end of the period for bringing an appeal, or 
 (b) if appealed against, at the time when the appeal (or any further appeal) is disposed of. 
 (7) An appeal is disposed of— 
 (a) if it is determined and the period for bringing any further appeal has ended, or 
 (b) if it is abandoned or otherwise ceases to have effect. 
 (8) In this section ''associated company'' and ''provision'' have the same meaning as in section 309A. 
 309C Disclosure of qualifying third party indemnity provisions 
 (1) Subsections (2) and (3) impose disclosure requirements in relation to a directors' report under section 234 in respect of a financial year. 
 (2) If— 
 (a) at the time when the report is approved under section 234A, any qualifying third party indemnity provision (whether made by the company or otherwise) is in force for the benefit of one or more directors of the company, or 
 (b) at any time during the financial year, any such provision was in force for the benefit of one or more persons who were then directors of the company, 
 the report must state that any such provision is or (as the case may be) was so in force. 
 (3) If the company has made a qualifying third party indemnity provision and— 
 (a) at the time when the report is approved under section 234A, any qualifying third party indemnity provision made by the company is in force for the benefit of one or more directors of an associated company, or 
 (b) at any time during the financial year, any such provision was in force for the benefit of one or more persons who were then directors of an associated company, 
 the report must state that any such provision is or (as the case may be) was so in force. 
 (4) Subsection (5) applies where a company has made a qualifying third party indemnity provision for the benefit of a director of the company or of an associated company. 
 (5) Section 318 shall apply to— 
 (a) the company, and 
 (b) if the director is a director of an associated company, the associated company, 
 as if a copy of the provision, or (if it is not in writing) a memorandum setting out its terms, were included in the list of documents in section 318(1). 
 (6) In this section— 
 ''associated company'' and ''provision'' have the same meaning as in section 309A; and 
 ''qualifying third party indemnity provision'' has the meaning given by section 309B(1).'' 
 (2) In section 310 of that Act (provisions exempting officers and auditors from liability), the following provisions cease to have effect— 
 (a) in subsection (1), the words ''any officer of the company or'', and 
 (b) in subsection (3)— 
 (i) the words ''officer or'' (in both places), and 
 (ii) the words from ''section 144(3)'' to ''nominee) or''; 
 and in the sidenote, for ''exempting officers and'' substitute ''protecting''.'.—[Jacqui Smith.]
 Brought up, and read the First time.

Jacqui Smith: I beg to move, That the clause be read a Second time.The Chairman: With this it will be convenient to discuss the following:
 Government amendment No. 2. 
 Government new clause 2—Funding of director's expenditure on defending proceedings. 
 Government amendment No. 3.

Jacqui Smith: As I said earlier, the Bill aims to ensure that we put in place the legal framework to
 ensure effective corporate governance, financial reporting and audit. The second part of the Bill aims to put in place the important ability, through the new vehicle of community interest companies, to develop the great potential that social enterprise has to offer our economy and communities. Today, we are focusing on the first part of the Bill.
 In the new clauses, we focus on the issue of directors and their liability in particular. Directors play an important part in corporate Britain, being responsible for the performance of Britain's 1.8 million companies, which account for about 80 per cent. of economic activity measured by turnover and provide some 60 per cent. of employment. Their performance is therefore a crucial factor in improving British productivity and competitiveness, providing the jobs that are so crucial as well as the prosperity that comes from the effective running of corporate Britain, and ensuring the trust that we all need to have in our companies as employees, suppliers or customers. 
 The new clauses also consider the difficult issue of directors' liability. The Government published a consultative document in December last year, which helped to stimulate a vigorous debate on that issue. That is not surprising, because, as I said, directors play such an important role in Britain's business life. At the same time, because of that crucial role, discussions about issues relating to directors can all too often generate more heat than light. That is why it is so important that in making these recommendations in our proposals we have been able to build on not only our recent consultation, but the recommendations of the independent company law review and the review carried out by Sir Derek Higgs at the request of the Chancellor and my right hon. Friend the Secretary of State to look into the issue and role of non-executive directors, and in particular their effectiveness and how we can ensure a pool of sufficient high quality. 
 When we consider the issue of directors, there is substantial agreement on the objectives that we are trying to achieve: first, a diverse pool of high-quality individuals willing to assume the important role of company director; secondly, that those directors are willing to take informed and rational risks in the direction of the companies for which they have responsibility; and thirdly, the maintenance of a high standard of care, skill and diligence for company directors by ensuring that companies can hold negligent directors to account. 
 That final point is important. We need people who are willing to become directors, but that is not enough in itself. We need directors who are conscientious, well informed and honest. It is clearly important that a director who acts in breach of his duties to the company can be held to account by it. That is why the prohibition on companies exempting directors from, or indemnifying them against, liability was introduced as long ago as 1928. That is the issue that the new clauses seek to address. 
 In recent years, the courts have imposed a much more demanding standard of care, skill and diligence on directors. That is a welcome development, which 
 we would certainly not wish to undermine. It is absolutely right that directors, in fulfilling their crucial role in corporate Britain, take seriously the responsibility to show the care, skill and diligence that we would expect of them. It is also right that the courts take that responsibility seriously. 
 Our consultation has, however, provided strong anecdotal evidence that concerns about liability are affecting the recruitment and behaviour of directors. Ironically, that is particularly true of those companies that most need strong directors, such as struggling companies and companies in sectors such as financial services. There appear to be two particular concerns: exposure to third party liabilities, particularly in the United States, and the cost of lengthy court proceedings. Those concerns are widely shared. 
 Two thirds of the responses to the consultation accepted, for example, that issues relating to potential liability might affect the recruitment of able non-executive directors. The Institute of Directors suggested that there is a particular problem in sectors such as financial services and that concerns are especially acute where companies face difficulties. As I suggested, that is precisely the situation in which companies need the most able directors, who are willing and able to take the difficult decisions that may be necessary to bring the company out of the position in which it finds itself. That is an important point. We need not only capable people at the top of our leading companies, but high-quality people to put struggling companies back on their feet. 
 It is clear from the business context why concerns are growing. For example, the action brought by Equitable Life against its former directors has understandably made many business people think twice before accepting a directorship, particularly when they might accept an even more lucrative consultancy role instead. As I suggested, the rise in the number of class actions against directors in the US is also a real concern to directors of companies with US exposure. In fact, it has been estimated that, on average, a non-US company with a US listing has slightly less than a one in 10 chance of being sued as a foreign issuer. An action usually targets the company and the directors, so it is no surprise that directors are becoming concerned. 
 Such concerns must, however, be kept in perspective. It is, for example, generally difficult under English law for shareholders acting for themselves, not as the company, and for other third parties to bring proceedings against directors, and it is still rare for a solvent company to bring an action against its directors or former directors. Nevertheless, it is clear that concerns about potential liability are having a significant deterrent effect. That is why the Government, listening to those concerns, have put together a balanced and carefully targeted package of reforms to address the key issues that have been identified. 
 We have tabled two new clauses to implement our proposals, and I shall consider each in turn. New clause 1 amends the provisions in the Companies Act 1985 relating to directors' liability. It does two things: first, inserts in the 1985 Act three new sections, 309A, 
 309B and 309C, which replace the existing provisions on directors liability, but not auditors' liability, and secondly, disapplies existing section 310 from directors and other officers. 
 I shall describe the three sections in detail. New section 309A begins by restating the core prohibition on companies exempting directors from, or indemnifying them against, liability. Many key elements of section 310 of the 1985 Act are retained. In particular, a company is prohibited from exempting a director from, or indemnifying him against, a liability to the company; and a company is permitted to purchase and maintain insurance against any such liability. 
 There are, however, three important changes from section 310. First, in line with the recommendation of the company law review, the new section does not extend to liabilities of officers other than directors. As the review suggested, it is ultimately a matter for the board to determine the conditions of employment of senior employees. Secondly, respondents to our consultation noted that the law is unclear about the ability of a third party to indemnify a director against a liability to the company. We do not believe that, in most cases, there is a strong case for preventing that—the company's money is not at risk. It is important, however, that other companies in the same group cannot be used to circumvent the prohibition on the company. 
 If a company itself is not permitted to provide indemnification, it cannot be right for another group company to do so. Subsection (3) of new section 309A therefore provides that an indemnification agreement is void if it is made by the company itself or by an associated company. Subsection (6) defines an associated company as, in effect, a company in the same group. 
 Thirdly, we wish to address directors' concerns about their exposure to third party liabilities by clarifying the law in respect of the ability of companies to indemnify directors against liabilities to third parties. The Government do not believe that there is an objection in principle to permitting indemnification by the company of directors in respect of third party claims, not least because such claims could—and, arguably, should—be brought against the company. 
 We also accept that that is a matter of very great importance to many companies and directors. It is more likely that an action will be brought against a director by a third party than by the company, so this is the most urgent and significant issue that needs to be addressed in respect of directors' liability. It is particularly so in the case of companies with an overseas listing, not least because of the inexorable rise in the number of class actions taken in the United States. 
 Section 309A(4) therefore states that the prohibition against indemnification by a director's company or associated company does not apply to a qualifying third party indemnity provision. A qualifying third party indemnity provision is defined in new section 309B, which sets out three conditions 
 that must be satisfied for an indemnity to qualify. Condition A is that a qualifying provision may not provide any indemnity against any liability incurred by the director to the company itself or to an associated company—that relates to my point about our not pursuing the ability of a company to indemnify its own directors. 
 Condition B is that a qualifying provision may not provide any indemnity against any liability incurred by the director to pay a civil penalty to a regulatory body such as the Financial Services Authority. In other words, one cannot indemnify a director against having to pay the consequences of their action when that action is not approved by a regulatory body . 
 Condition C is that a qualifying provision may not provide an indemnity against any liability incurred by the director in defending any proceedings, whether civil or criminal, in which he is convicted or judgment is given against him, except for civil proceedings brought by third parties. That condition is largely the mirror image of the current section 310(3), under which a company is permitted to indemnify a director against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or he is acquitted. 
 Subject to those conditions, companies would be permitted to indemnify directors in respect of proceedings brought by third parties. Indemnification in those cases could cover both the legal costs and the financial cost of any adverse judgment, except criminal penalties or those imposed by regulatory bodies. That would be of particular benefit to companies with a US exposure, as it would enable them to indemnify directors against liabilities arising from class actions by groups of shareholders. 
 Proposed new section 309C of the 1985 Act concerns disclosure. It is important in such an area that companies and directors act openly and transparently. We therefore intend to require a statement in the directors' report as to whether a director has been indemnified by the company or by an associated company. That will act as a warning flag to shareholders, who will have the right to inspect qualifying third party indemnity provisions made by the company or an associated company. That right is achieved by applying section 318 of the 1985 Act, under which directors' service contracts must be open to inspection by shareholders. Companies that choose not to indemnify directors will not have to make any such disclosure. 
 The current section 310 of the 1985 Act covers both director and auditor liability. Although the issues are linked, it is not inevitable that that should be so; indeed, the Companies Act 1929, which first introduced the statutory prohibition, had separate sections relating to director and auditor liability. Under the proposals, the current section would be amended by subsection (2) of the new clause so that it would deal only with auditors' liability, while proposed new sections 309A, 309B and 309C would address directors' liability. 
 I come to new clause 2. As I mentioned, the consultation demonstrated two issues, the second being a concern about the cost of legal proceedings, which is understandable. A director against whom a legal action is brought faces both a damaged reputation—the damage may be severe but it is beyond statutory relief—and the prospect of having to fund his own defence, even if the action is malicious or unlikely to succeed. At the moment, a company can indemnify a director who is successful in the proceedings, but arguably, that provision will provide cold comfort to the director at the beginning of a legal action that may last for several years, and in which no help with legal costs is available. The Government therefore intend to implement the recommendation of the independent company law review and Sir Derek Higgs that the Companies Act should allow, but not require, companies to pay directors' defence costs as they are incurred, even if the action is brought by the company itself or is a derivative action. 
 Section 330 of the 1985 Act currently restricts a company's power to make loans to directors or to enter into certain types of credit transactions with them. New clause 2 therefore inserts a new section—337A—into the 1985 Act to permit companies to pay directors' defence costs, in civil or criminal cases, as they are incurred. The director will, however, be required to repay the loan if he is convicted in criminal proceedings or if judgment is made against him, except where, by means of a qualifying third party indemnity provision under new sections 309A and 309B, which I described, the company chooses to forgive the loan in the case of civil proceedings brought by a third party. Although I accept that in some cases the director might be unable to repay the loan in full, this proposal clearly retains a moral hazard; indeed, the director might be facing insolvency as well as suffering severe damage to his reputation. The two related amendments, Nos. 2 and 3, are entirely consequential on the new clauses and respectively amend schedule 8, which lists repeals and revocations, and the Bill's long title. 
 In summary, I believe that our package of reforms will provide much needed clarity and will address key concerns that have been raised with us during and outside the consultation process: that we risk being unable to find the best and most talented people to be directors of our companies, or being unable to help them to take difficult decisions; and that we should take into consideration the context within which our companies and their directors must operate. In addressing those concerns in a proportionate and targeted fashion, the new clauses will help to ensure that honest, capable people will still want to become company directors, and will direct our companies in a manner that is important to our overall prosperity and to future jobs in corporate Britain.

Andrew Mitchell: As the Minister said, the Bill is about trying to ensure that corporate governance is effective. We shall come in due course to the social enterprise provisions to which the Minister referred, the principle
 of which we all support. She mentioned that the new clauses deal with the 1.8 million companies on which the wealth of our country is built, and that they arise from the consultative paper issued by the Department of Trade and Industry in December.
 The Minister said a few words about the responses that she and her Department received. May I remind her that she kindly said on Second Reading that she would make available an analysis of the responses to that consultation paper in respect of both directors' and auditors' liability? We look forward to seeing that analysis. 
 The Minister also referred, rather unwisely, to the company law review. One of the Opposition's principal objections to the Bill is that it is a veritable mouse: not the full-blooded reform of company law that we have been promised for so long, but a very small part of what should be a major Bill. We do, however, agree with the Minister when she says that it is essential that we maintain a good pool of non-executive directors. As she rightly said, negligent directors should be held to account. She set out the problems lucidly, but our reservations about the new clauses stem from the Government's response. Our reply to her comments today and to the Government's new clauses is that we give them one cheer. They are, so far as they go, a move in the right direction, but a limited and inadequate one. 
 The Minister gave some detail on the new clauses, for which I am most grateful, as they are exceedingly complex. New clause 1 deals with the law in section 310 covering a director, which will now be dealt with in new section 309A. These changes mark a relaxation in the prohibition of provisions protecting directors from liability, subject to three conditions in new section 309B that are clearly right. The first is that there can be no company indemnity against a director's liability. Secondly, there can be no indemnity against fines, whether criminal or regulatory; without that condition the law would be nonsense. Thirdly, there can be no indemnity against costs if a director is convicted. 
 I have two questions for the Minister about new clause 1. As she said, under new section 309C the details of an indemnity would have to be in the company's report and accounts. As I understand it, such an agreement does not require sanction or agreement by shareholders. The Minister was quick to say that shareholders could of course examine the agreement, but she did not say whether their sanctioning of, or agreement to, such a deal between the company and its directors would be required. 
 If shareholder agreement is not required, do the Association of British Insurers and the National Association of Pension Funds agree with the Minister's decision? Will she confirm that even if the Companies Act does not require shareholder sanction, the law and the relevant regulations leave it open to the Financial Services Authority—or, indeed, to Hermes—to ask for shareholder approval on those points? 
 New clause 2 deals with cases in which companies pay a director's costs. That enables a director to 
 receive what is effectively a loan from the company until he or she wins the case. If the case is lost, the money has to be paid back. That is clearly necessary because, under section 330 of the Companies Act 1985 there is a general prohibition on loans. The new clause makes it clear that such provisions apply only to a loan for a director's defence if the director loses, and that they apply to civil and criminal proceedings. 
 I have several questions about new clause 2. First, if a director faces regulatory proceedings, will they be covered by the Bill's definition of civil proceedings? Will new clause 2 apply when someone comes before the regulator because the process is being treated as a civil proceeding? Secondly, what does subsection (3) of new section 337A mean? I have reread it several times and perhaps it is my inadequacy but I cannot understand the meaning of the following: 
''Nor does section 330 prohibit a company from doing anything to enable a director to avoid incurring such expenditure.''
 My third question may also arise from my misunderstanding or from inelegant drafting, although that is hard to believe, given the skill of the Minister's officials. As I understand it, a director who is convicted is given no time to pay back the money that he has been lent by the company for his defence. I take that to mean that as he was sent down, he would, from the dock, have to hand a cheque to the company to reimburse it for the costs. Perhaps the bailiffs could be sent round within minutes of a conviction if no cheque has been produced. Would the Bill not be better and more elegant if it stated that someone so convicted, and who has to make a repayment, should have a month or 30 days in which to do so? 
 We give a cautious welcome to the new clauses and associated amendments. What we are discussing today is a cash-flow matter—an easing of the law. The company law review made it clear that companies should be able to do as we have been describing without infracting section 310, as long as they had a relevant legal opinion. In Sir Derek Higgs' report to the Government, he made it clear that he did not think that a legal opinion was required, and the Government have accepted that advice. 
 The new clauses are a modest improvement but they say little about the more general liabilities of directors. However, the Minister made a point of saying said that she was concerned about those liabilities. Clause 9 has been rewritten; previously, it placed an onerous and unacceptable burden on directors in general. As a result of the rewriting, which was done largely at the behest of Lord Hodgson of Astley Abbotts, directors now have some defence, but there remains no distinction between executive and non-executive directors. 
 As I said on Second Reading, under present company law all directors are considered equally responsible for the company and therefore equally liable. The new clause 9 does not undermine that. However, a non-executive director does not play the same role as the executive director, nor is he as well informed about the operations of the company. He 
 must rely on his co-directors, yet the new clause fails to recognise that. 
 Any person thinking of taking on a non-executive role will ask what risks are involved and what are the possible costs. If we want to encourage good-quality people to take on those positions—a point made by the Minister in her opening remarks—we must ensure that the degree of risk involved does not outweigh any potential reward. As the Bill stands, the role of the non-executive director will become increasingly undesirable. 
 The potential personal liability of a director of a public company is now out of all proportion to any reward that he or she may receive. As a result, good people will not come forward to serve on major public boards. We are moving towards a situation in which experienced, independent non-executive directors will not be willing or available to come forward. That is happening at a time when, as the Minister said earlier—and we agree with her—company boards should have more independent non-executives, in order to promote good corporate governance. 
 I said on Second Reading that, as Lord Hodgson pointed out in the other place, 
''we are nearing the point when the only qualification for being a non-executive director is to know nothing about it.''—[Official Report, 7 September 2004; Vol. 424, c. 648.]
 I shall talk about auditors later this morning, but our argument about capping the potential liability of directors remains compelling. Now that the consultation process is complete, the Government should do more to address it. 
 The Minister referred to the Equitable Life case. That case raises important questions for corporate governance. If non-executive directors are to remain personally liable for their decisions—decisions that are based on the best possible professional advice, or what they have every reason to believe is the best professional advice—what possible incentive is there to be a director of a large public company? For a successful business man, the fees are most unlikely to be adequate justification. The downside, with the loss of professional reputation and now the real risk of financial ruin, is too great. 
 I understand that head-hunters found clear evidence that certain people who should be non-executive directors of public companies—the Minister and I would entirely agree on what characteristics such people should have—are no longer willing to take on those risks. There may be no shortage of candidates, but good corporate governance depends on such people being the right type of candidate. I know of many well respected senior business men and women who have no intention of serving again on a public company board; the risks go way beyond any possible reward. 
 Faced with that much rehearsed and well understood problem, the DTI, with all its expertise and understanding, has given birth to this modest Bill. Thank goodness that the extent of any such liability has not yet been tested in the British courts. However, with a not dissimilar legal code, the Australian courts 
 have found that the duty of care of a non-executive director is less than that of an executive director. 
 In passing, I should mention that the only case in which such an issue has been before the courts in the UK took place in the 19th century. At the age of six months, the Marquis of Bute was made a director of the Cardiff savings bank. He attended only one board meeting during his 30 years on the board—and as the court record showed, that was only because he happened to be in the area at the time. The Cardiff savings bank went bust, and in the ensuing legal proceedings the court determined that his culpability was less than that of an executive director. 
 If the Equitable Life case comes to court, it will undoubtedly have a significant effect on the future of corporate governance in Britain. Faced with such important issues, and with the Government's response in the new clauses, a high-flying executive will have little or no incentive to sit as a non-executive on a major public board. That is at the heart of our concerns about the Government's new clauses. 
 We welcome the proposals in so far as they make some difference to the cash-flow position of exposed directors. However, the wider issues that I have set out and to which the Minister referred have not been addressed, and they will have to be, in the interests of corporate governance. It is a pity that the Government have not taken the opportunity, if not to table new clauses to give effect to that requirement, at least to make clearer their determination to address a matter that is at the heart of good corporate governance in Britain.

Brian Cotter: In the past I would have declared an interest as the managing director of a manufacturing company, but last September I ceased to a director. However, it has just occurred to me that I am, I think, a director of an organisation called the Genesis initiative, a project for small business that is driven by Parliament—although I shall check on that as the Committee proceeds. I have neither received any remuneration nor taken any decisions with any financial or other impact, but one never knows. I shall check my present status on that, but I have no remunerated directorships.
 I thank the Minister for her detailed explanation of the new clause and the other clauses in the group. The consultation process on the Bill has been encouraging and we hope that most concerns have been met and most issues covered. It is important that the Bill be changed, to encourage people from all backgrounds to become directors. When I ceased to be a director last September, the other shareholders and I sold the site and the factory. Our employees, many of whom come from a shop floor background, received free shares and were given the company to run. They have been landed with a company, free of charge, which from their point of view is good. They now successfully run the company, albeit a slimmed down version. I hope that they will now feel even more comfortable, as their liability will be reduced. 
 As a former director of a manufacturing company, may I make a relevant anecdotal point? On one occasion I was shocked to hear that we had had a break-in at the weekend. Some people had gone around, broken up machinery and stolen a few things here and there. They had reached our top floor, which was not being used, and got in through a door. The police came to check and found that if someone went through one door at the end of our top floor, they would fall to the ground floor. Unfortunately, that door was not bolted, and I was told that had those burglars opened that door and fallen to the ground, I would have been liable if they had broken their legs, or to their families if they had died, which I thought somewhat bizarre. That was the sort of thing that one learns about too late, but fortunately the burglars did not open the door and did not fall to the ground. 
 The fact that the proposals will give extra protection to directors is welcome. One might say that, as with school governorships, a role about which people who undertake it have lots of concerns, the measures will encourage people who might otherwise be worried about lacking a financial background to take on directorships. That should be welcomed in this day and age, when we want to encourage as much participation as possible in businesses. On that basis, I welcome the Minister's proposals and look forward to her summary.

Jacqui Smith: I thank hon. Members for their welcome for the Government's proposals—in some cases it was wholehearted, in others slightly less so. On the point raised by the hon. Member for Sutton Coldfield, copies of the summary of responses to the consultation were placed in the Library on 9 September. I shall, however, ensure that I provide copies for all members of the Committee before this afternoon's sitting. Does the hon. Gentleman want to intervene?

Andrew Mitchell: I am grateful to the Minister for giving way. However, I do not want to hear a huge regurgitation of what everyone said in response to the consultation, but an analysis by category of what they were in favour of, or, possibly, against.

Jacqui Smith: The way in which we have outlined the responses to the consultation will give the hon. Gentleman not only some detail about what people said, but some general comments about what they were or were not in favour of. I know which point the hon. Gentleman is keen to pursue in relation to the responses.
 The hon. Gentleman asked some specific questions about the new clauses. First, he asked whether the arrangements in new clause 1 should not only be signposted for shareholders, but receive specific shareholder approval. In this case, we have decided against the need for specific prior shareholder approval for the arrangements, not least because they will in no way restrict a company's ability to bring an action against a director for breach of duty. To that extent, they would not limit the shareholders' ability to hold the directors to account. On his more specific question, it will, of course, be open to individual companies to require shareholder approval 
 if they think it appropriate. As I suggested, all companies that indemnify directors will be required to make a disclosure to their shareholders. 
 The hon. Gentleman asked about the position with regard to representatives of institutional investors, and the ABI has expressed support for it. Institutional shareholders could, of course, press companies to seek prior approval; that would be a normal part of good corporate governance. However, for the reasons that I suggested earlier, I do not think that a case has been made for a requirement for shareholder approval in advance in all cases.

Peter Atkinson: May I pursue the Minister slightly on the issue? I share the concern expressed by my hon. Friend the Member for Sutton Coldfield about the view that shareholders should not have an automatic right to approve indemnity arrangements. I am trying to get some idea of the size of such arrangements, and I take it that some could involve substantial sums, particularly if a company's subsidiary in the United States were subject to a class action. Given what is happening in the insurance market, particularly the reinsurance market, there is a growing reluctance on the part of companies to reinsure risks that could involve vast unquantifiable sums. We could be talking about a substantial annual bill for indemnifying directors. Surely, shareholders should have an automatic right to say yes or no to that.

Jacqui Smith: The extent to which people might be looking at a bill will depend on the extent to which actions are taken and directors are found liable. As I said, we would not want to move away from a position in which the responsibility for due care and diligence and skill rests with directors.
 Frankly, I cannot say what sums might be involved in such indemnifications, but I believe that institutional shareholders accept that that would be a reasonable step in relation to directors. Companies have not opposed our proposals for directors—not least because they recognise that the success of those companies depends on their being able to recruit effective directors, as the hon. Member for Sutton Coldfield said. 
 We have adequately covered the need for shareholder transparency, which we have always argued is important. It is not something that prevents action being taken by a company against directors, but shareholders can look at the details of the sort of indemnification arrangements that might be made available, and in some cases companies might decide that they deserve shareholder approval. Whether we make it compulsory in every single circumstance is a regulatory issue. We have decided that that is not necessary.

Peter Atkinson: I apologise for pursuing this, but it seems that most of the arrangements that companies make will be permanent, insurance-based arrangements to provide funds if they have to indemnify a director. In American class actions, huge amounts of money are involved. If a company has to pay a regular annual bill—because the arrangement is
 ongoing, not a one-off—shareholders should have a say in approving the arrangement.

Jacqui Smith: I understand the point that the hon. Gentleman is making, and I reiterate that the question is whether we should make that an ''always and everywhere'' regulatory requirement in this legislation. There are arguments about why that is not necessary, but there might be cases in which individual companies consider that it is appropriate to require shareholder approval.
 Let me move on to the questions that the hon. Member for Sutton Coldfield asked about new clause 2. The first was whether covering the costs of actions taken by a regulator would come under its ambit. Regulatory proceedings, in particular court proceedings that might be needed to recover any fines imposed by the regulator, are civil proceedings, and would therefore come into that category. The hon. Gentleman also said—I am surprised at him, given the clarity of the drafting and the quality of my officials—that he was a little hazy about the precise details of new section 337A(3). That would cover the sort of case in which the company engages a director's solicitors and pays their bill direct. That is not a loan, but it is equally important both that that sort of arrangement should be allowed, and that a director who loses his case should repay the amount paid on his behalf. That is very similar to the provisions of existing section 337(2). It is not a loan; it is a direct support. Nevertheless, in that it achieves the objective of supporting the director through the costs of the legal proceedings, it might be equally important. 
 The hon. Gentleman also raised the spectre of directors being forced to get out their cheque books while clamped in irons and being sent down. The effect of new section 337A(4) is that the terms of the loan agreement should be that the director must pay if he loses his case. That means that he becomes liable to repay at that point, and can be sued by the company or its liquidator or, if he becomes insolvent, the debt can be claimed in bankruptcy proceedings. It does not mean, in practical, common-sense terms, that the cheque must be produced at the very moment of conviction; it is about the point at which the director becomes liable for the repayment of the debt. I am not sure whether it is appropriate for this legislation to lay out what type of arrangements for debt collection might be put into operation in that particular circumstance. There might be a variety of arrangements; the point is that that is the point at which liability happens.

Andrew Mitchell: I am grateful to the Minister for setting that out. It was not clear from the drafting of the Bill, but the courts will now be able to read the Minister's words in Committee, which clarify the primary legislation.

Jacqui Smith: The hon. Gentleman went on to push the Government a little more generally in relation to our position on directors. He cited, as I believe he did on Second Reading, the position under clause 9, which has now changed because of changes made by the Government in another place, following discussions and issues raised by the Opposition to which the Government rightly responded. Clause 9 now does
 distinguish between the skills and responsibilities of a non-executive director and, say, the finance director, and is now much clearer.
 The hon. Gentleman also raised a broader point about the status of the directors and their responsibilities. Case law, as he suggested, already distinguishes between executive and non-executive directors in its application of the duty of care, skill and diligence, so a statutory distinction is unnecessary and might actually serve to undermine the UK's unitary board system, under which executive and non-executive directors sit beside each other in their direction of the company. That, I believe, is seen as a strength of the UK system. The distinctions between the types of care, skill and diligence that they would be expected to bring to their jobs are probably better interpreted as case law is increasingly being interpreted, rather than by a statutory distinction between the role of executive and non-executive directors, which was almost what the hon. Gentleman was suggesting.

Ian Taylor: I rise to speak partly because I have a declared interest on the Register of Members' Interests as a director of some public and private companies, and I did not want to miss the chance of declaring that, because we are obviously moving to a conclusion on the new clause. The Minister is right that case law is moving rapidly ahead in making clear the responsibilities of non-executive directors—or, as they are increasingly being called, independent directors. I do not, however, want to underestimate the increasing responsibilities of those independent directors, of which I am one, given that they are increasingly given clear committee responsibilities, such as for audit or corporate governance, which are then set out in the annual report. The whole essence of the matter is therefore that independent directors are now becoming really responsible, which is why in America class actions are beginning to take in all the directors.
 I do not want to anticipate anything that might happen to Shell—a company that has got itself into some difficulties—but it will be quite difficult for certain non-executive, or independent, directors to claim that they were not very much involved in the events in that company.

Jacqui Smith: The hon. Gentleman makes an important point, and does not, I believe, necessarily disagree with my position. In fact, he reinforces the need for the sort of action that we are taking. As he says, it is precisely the emphasis now being placed on the role of non-executive directors, particularly in relation to audit committees and other areas, that places at an even greater premium the need to ensure that we can recruit and retain those skilled directors, and that they feel able to take some of those difficult decisions. We are far away, or should be, from the position outlined by the hon. Member for Sutton Coldfield, whereby directors, whatever their age, roll up occasionally to a meeting because there might be a good lunch. We are clearly moving away from that.
 The issue involves important considerations about liability, which these clauses cover.

Andrew Mitchell: I hope that the Minister was not suggesting that I look back with any favour on the days in which that was the case. I certainly do not. As I said at the beginning of my remarks, it is important that where there is negligence or worse by directors, the law should bear down on that in the firmest possible way.
 I am not, as the Minister seemed to hint a moment ago, in favour of anything that damages the concept of the unitary board. We are absolutely at one on the importance of corporate governance delivered by unitary boards. However, she cannot turn her back on the arguments. The evidence of head-hunters and the eloquent words of many people in the corporate sector, including regulators, identify the problem that I set out at some length. 
 Our reservations about the clauses are not about what they do—they are a modest step in the right direction—but are about the fact that they say nothing about the bigger picture. It is not good enough for the law not to differentiate between non-executive directors and executive directors, or for corporate governance to rely on case law and the words of the court. The law as administered and proposed by the Minister's Department and set out in the company law review must keep up with events in the wider corporate world.

Jacqui Smith: I agree with the hon. Gentleman. Perhaps I can say a little about where I think we need to go with regard to directors' duties in a moment.
 I am not sure that the hon. Gentleman has gone so far, but some have suggested that we should have gone further by permitting a company to limit a director's liability to the company. Although we need to keep in mind what is necessary to get high-quality directors, we are not completely persuaded of that case. In the first place, many people would find it a difficult idea in principle. 
 Most responses to the Government's consultation favoured an approach based on the more limited reform proposals of the company law review. We are effectively putting those into operation through the new clauses. Only a minority of respondents, although a significant minority, said that we should permit companies to cap directors' liability to the company. That is not surprising, because the current prohibition on exemption and indemnification by the company was introduced as long ago as 1928, because it had become usual for companies to draft wide exemption clauses in their articles, effectively relieving their directors of any liability except in the case of wilful negligence or default. 
 Some of the reasons behind the original legislation are still important and valid today. Directors' general duties are owed to the company, and it is therefore important that companies can hold directors to account if they act in breach of those duties. It is important to remember that agreements are usually signed when things are going well. If a board believed that a director had acted negligently, it might find that its earlier agreement to cap that director's liability 
 made legal action unattractive, but then it would be too late. As a result, the negligent director could not be held to account. 
 There are also some practical issues. Very few people would want companies to be able to exempt directors from liability rather than capping their liability, but it would in practice be difficult to agree a statutory threshold that both satisfactorily addressed the concerns of many first-time non-executive directors and retained the moral hazard for the very wealthiest executive directors. In other words, in defining the way in which directors' liability should be capped, there would be some difficult issues, including what form the cap would take. 
 The hon. Gentleman's general point is about the clarification of the role and duties of directors. The Government are committed to implementation of the recommendations of the company law review. The review of course examined the difficult issue in question, and one of its most important proposals was the introduction of a statutory statement of directors' general duties to the company. That would be an important and far-reaching reform, and would, for the first time, provide authoritative guidance on what is expected of directors. It would enable us to adopt a more targeted approach in future to reform of the law on directors' liability. We would, for example, be able to permit companies to cap directors' liability for negligence without permitting them to cap liability if directors put personal interests before their duty to the company. 
 Future action on the issue of directors is closely linked to the Government's taking forward the company law review's proposals on codifying directors' duties.

Andrew Mitchell: This morning, the Committee has heard the Government give a commitment to introducing the company law review's recommendation. However, it is inconceivable that they will do so without presenting the long-awaited Bill that was previewed by the company law review. When can we expect that measure? Will it be in the next Session of Parliament? Will the Minister give the Committee a commitment on that important Bill, which bears greatly on the future of British companies and of corporate governance in Britain?

Jacqui Smith: I was just coming to that. I have discussed how we deal with directors' liabilities and duties and the interrelationship between them. This morning's discussion has shown that that issue is just one small part of the complex major reform of company law. We have made it clear—I did so on Second Reading—that we will carry out many of the reforms recommended in the company law review. Importantly, that will secure the objectives of increasing shareholder engagement and of framing the legislation on the basis of thinking small first, thereby making it more appropriate to, and accessible to, small businesses.
 The issues arising in this morning's discussion have identified—as I suspect we will in discussing auditor liability—some of the complexities involved in 
 achieving the relevant overall objectives that we have set for company law reform, and in making sure that everyone, be they shareholders, directors or institutional investors, can buy into those objectives. This is indeed a complex area. 
 I am not making any excuses for the progress that we are making; in my view, we have already made considerable progress. We have consulted on a range of areas in which we shall introduce reform. In particular, we have issued a consultation document detailing radical new powers for reforming and restating company law, so that, following major reform, it will be possible to keep the law up to date. 
 As I said on Second Reading, we shall also present a draft Bill as soon as we can, because hon. Members and others outside the House will want to study it in detail and legislate on the basis of it. Perhaps the hon. Member for Sutton Coldfield wants to jump up to ask me when that will happen, but he knows that even new Whips are clear that it is not for Ministers to say when Bills will be presented. That matter is outside ministerial responsibility. Nevertheless, considerable progress is being made and we are close to producing the draft Bill.

Andrew Mitchell: The Minister is subjecting the Committee to a legislative dance of the seven veils. She entices us by saying that a Bill is imminent, and she appears—just about—to give us a date. She says that she intends to publish a draft Bill, and we applaud the Government for that because it is exactly the right way to proceed. She refers to the Government Whip—I congratulate him on his appointment; it is one of the best jobs in government, because the holders of it know almost everything about everything that is going on—and rightly says that she cannot commit the Government to a precise date. Can she say a little more? Can we expect the draft Bill to be published within, say, the next year?

Jacqui Smith: I am afraid that the hon. Gentleman cannot entice me to take off any more veils today. I have clearly identified the progress that is being made and the process that we shall pursue from hereon in. I shall not get myself into further trouble by saying more.
 The hon. Member for Weston-super-Mare (Brian Cotter), who brings to the discussion his experience as a company director, ably identified some of the challenges faced by those who run our companies, both large and small. He, too, emphasised the need to ensure that we get a diverse range of the most effective and skilled directors, and that, of course, is what the proposals are about. On that basis, and given the clarification that I think I have been able to give of some of the details, I hope that hon. Members will support the new clauses and amendments Nos. 2 and 3.

Andrew Mitchell: I should make it clear to the Minister that I will advise my colleagues on the Committee not to oppose the provisions. However, we reserve the right to table amendments on Report, along with new clauses on the issue of directors' liability.
 Question put and agreed to. 
 Clause read a Second time, and added to the Bill.

New clause 3 - Amendment of Companies Act 1985: limit on auditor's liability (No. 1)

'(1) Section 310 of the Companies Act 1985 (c 6) (provisions exempting officers and auditors from liability) is amended as follows. 
 (2) In subsection (2) delete ''subsection'' and insert ''subsections''. 
 (3) After subsection (3) insert— 
 ''(4) A company may, in pursuance of such a provision, enter a contract with any such auditor to limit any liability which by virtue of any rule of law would otherwise attach to him in respect of any such negligence, default or breach of duty to an amount equal to the proportion of the total loss or damage suffered which is directly attributable to the negligence, default or breach of duty of the auditor having regard to the contribution to the loss or damage of any other person, provided such contract is approved by members in general meeting.''.'.—[Mr. Andrew Mitchell.]
 Brought up, and read the First time.

Andrew Mitchell: I beg to move, That the clause be read a Second time.The Chairman: With this it will be convenient to discuss the following:
 New clause 4—Amendment of Companies Act 1985: limit on auditor's liability (No. 2)— 
'(1) Section 310 of the Companies Act 1985 (c 6) (provisions exempting officers and auditors from liability) is amended as follows. 
 (2) In subsection (2) delete ''subsection'' and insert ''subsections''. 
 (3) After subsection (3) insert— 
 ''(4) A company may, in pursuance of such a provision, enter a contract with any such auditor to limit any liability which by virtue of any rule of law would otherwise attach to him in respect of any such negligence, default or breach of duty to an amount equal to twenty times the fees paid in respect of the audit of the company, provided such contract is approved by members in general meeting. 
 (5) Where an act of negligence, default or breach of duty arises in two or more consecutive periods of account, the liability under subsection (5) shall be restricted to twenty times the average of the audit fee for the company for those periods of account.''.'.
 New clause 5—Amendments of Companies Act 1985: limit on auditor's liability (No. 3)— 
'(1) Section 310 of the Companies Act 1985 (c 6) (provisions exempting officers and auditors from liability) is amended as follows. 
 (4) In subsection (2) delete ''subsection'' and insert ''subsections''. 
 (5) After subsection (3) insert— 
 ''(4) A company may, in pursuance of such a provision, enter a contract with any such auditor to limit any liability which by virtue of any rule of law would otherwise attach to him in respect of any such negligence, default or breach of duty to the sum of £75 million. 
 (5) Where the company is a member of a group of companies the sum of £75 million shall be divided between members of the group pro rata to the audit fee charged to each company within the group, provided such contract is approved by members in general meeting. 
 (6) Where an act of negligence, default or breach of duty arises in two or more consecutive periods of account, the liability under subsection (4) shall be restricted to £75 million for those periods of account.''.'.
 New clause 6—Amendment of Companies Act 1985: limit on auditor's liability (No. 4)— 
'Section 310(3) of the Companies Act 1985 (c 6) (provisions exempting officers and auditors from liability) is amended, by adding at the end— 
 ''(iii) From entering a contract with its auditors to limit their liability in respect of any negligence, default or breach of duty provided such contract is approved by members in general meeting.''.'
 New clause 7—Limit on auditor's liability (No. 1)— 
'The liability of an auditor which by virtue of any rule of law would otherwise attach to him in respect of negligence, default or breach of duty shall be limited to an amount equal to the proportion of the total loss or damage suffered which is directly attributable to the negligence, default or breach of duty of the auditor, having regard to the contribution to the loss or damage of any other person.'.
 New clause 8—Limit on auditor's liability (No. 2)— 
'(1) The liability of an auditor which by virtue of any rule of law would otherwise attach to him in respect of any negligence, default or breach of duty shall be limited to an amount equal to twenty times the fees paid in respect of the audit of the company. 
 (2) Where an act of negligence, default or breach of duty arises in two or more consecutive periods of account, liability under subsection (1) shall be restricted to twenty times the average of the audit fee for the company for those periods of account.'.
 New clause 9—Limit on auditor's liability (No. 3)— 
'(1) The liability of an auditor in respect of any liability which by virtue of any rule of law would otherwise attach to him in respect of any negligence, default or breach of duty shall be limited to the sum of £75 million. 
 (2) Where the company is a member of a group of companies, the sum of £75 million specified in subsection (1)(b) shall be divided between members of the group pro rata to the audit fee charged to each company within the group.'.
 New clause 10—Limit on auditor's liability (No. 4)— 
'(1) The liability of an auditor in respect of any liability which by virtue of any rule of law would otherwise attach to him in respect of any negligence, default or breach of duty shall be limited to the lower of— 
 (a) an amount equal to the proportion of the total loss or damage suffered which is directly attributable to the negligence, default or breach of duty of the auditor having regard to the contribution to the loss or damage of any other person; and 
 (b) the sum of £75 million. 
 (2) Where the company is a member of a group of companies, the sum of £75 million specified in subsection (1)(b) shall be divided between members of the group pro rata to the audit fee charged to each company within the group.'.

Andrew Mitchell: We turn now, as you so helpfully indicated, Mr. Conway, to the issue of auditor liability, which is at the heart of the Opposition's concerns about the Bill. The issue was discussed at some length on Second Reading, and everyone on the Committee will regret that the hon. Member for Great Grimsby (Mr. Mitchell) is not here to pursue his vendetta against international capitalism, which he set out so eloquently on Second Reading. We were promised the awesome spectacle of a possible Mitchell amendment—it received cross-party support—on helping those below board level to limit their open-ended liabilities. It must be said that the only director whom the hon. Gentleman specifically criticised was Robert Maxwell, and decency forbids me from mentioning which party he represented in the
 House. Nevertheless, we regret the hon. Gentleman's absence today.

Ian Taylor: Because we Conservatives are pure in all these respects, I am sure that my hon. Friend will not want to avoid discussing the appalling affairs of Lord Black, who was also a press baron.

Andrew Mitchell: I have no intention of being drawn on such an issue, not least for fear of incurring your wrath, Mr. Conway.
 The important issue of auditor liability remains an omission from the Bill. I assure the Committee that my support for the measures has nothing to do with auditors as such. As far as I know, they are not one of the Conservative party's specific target groups at the next election. Indeed, I have spoken in the House on many occasions about how wrong the tax schemes introduced by audit firms are, particularly for City banks. I therefore yield to no one in complaining vigorously when the accountancy profession, in any of its forms, introduces such tax-avoidance measures. As I said, however, the current issue has nothing to do with auditors per se; it is about the good and proper governance of the British corporate system, and I hope to explain why. 
 Apart from auditors, there is no group in Britain, as far as I know, that is unable to limit its liabilities by way of either insurance or a contract with its customers. Auditors can do neither because of section 310 of the Companies Act, which was introduced 75 years ago, in 1929. It rightly dealt with the collusive relationships that then existed between auditors and the companies that they audited. I cannot remember whether it was a Conservative Government who introduced it, but—

Jacqui Smith: It was.

Andrew Mitchell: The Minister assures me that it was a Conservative Government, and I am delighted to place that on the record.
 It was right to take that action, but is it not bizarre that professional men and women are asked to take on a risk that the insurance market, which uses its resources to analyse such matters, now says is unacceptable? There are only four major auditors left and we need more, not fewer. The big four audit all the FTSE 100, but not quite all the FTSE 350. I am aware that the law now permits audit firms to be limited liability companies or limited liability partnerships. That provides some protection for the private assets of the partners in such firms, but it does not and cannot provide protection for the firms or for the capital that the partners have invested in them. As audit firms are unable to obtain external capital—to do so would undermine their independence—such firms are funded entirely by the partners' capital, which has often to be borrowed from banks and through leasing agreements and other financial arrangements. Frequently, those have to be guaranteed by the partners. 
 Two other factors are important in this context: the law of joint and several liability; and the fact, to which I just referred, that only four firms in the world are capable of auditing our largest multinational companies. The law of joint and several liability means that the audit firm is liable not only for its 
 own negligence but, if other parties are unable to pay their share of any loss, for the loss that those other parties caused. That hugely increases the jeopardy facing an audit firm. Because there are only four firms left that can audit our largest companies, it is important to make sure, so far as we can, that there remain four and, if possible, to encourage two or three other firms to make the necessary investment in the UK and throughout the world to enable them to take on the audits of larger companies. 
 Let me give an example of the problem that needs to be addressed. Let us imagine a large company that—despite the corporate governance codes, the era of shareholder activism and the best efforts of the auditor—is bankrupted as a result of following a disastrous strategy, its losses over past years having been concealed by the fraudulent behaviour of directors. Let us assume that the loss suffered is such that the liquidator successfully sues the directors and the auditors for, say, £1 billion. That is by no means the largest amount that has been claimed by a liquidator in broadly similar circumstances. Let us also assume the not unlikely scenario that the directors have some insurance and some limited private assets, but that together, those do no more than cover their legal costs. The auditors would then be left with a bill of £1 billion, which is so far in excess of their ability to pay that they, too, would be bankrupted. 
 In the situation that I have just described, it is obvious that the directors bear the greatest level of responsibility for having embarked on a strategy that failed and, more directly, for having perpetrated a cover-up. In such circumstances, a judge might well conclude that the directors were 90 per cent. to blame for the loss and the auditors were 10 per cent. responsible for failing to discover it. Without the law of joint and several liability, the auditors would have been responsible for making good damages of £100 million—a sum that each of the big four would just about be able to raise, bearing it in mind that they would also have to pay legal fees, regulatory fines and other costs that could amount to as much again. 
 The Government have recognised such a problem as being a real threat to the stability of the audit profession and to the UK's capital markets. As a result, last December they launched the consultation—we have discussed it today—on whether it would now be appropriate to remove the restrictions on auditors' limiting their liability. It is time to coax the Minister off the fence on which she and her ministerial colleagues have sat for far too long, and to urge her to make a decision. To help her, and in the best traditions of Her Majesty's loyal Opposition, we have framed a galaxy of alternatives for her to consider, each of which could solve the problem. 
 We ask that the Minister say something today to show that the Government are serious about addressing this issue in a timely way. 
 My first proposal would accommodate the Government's recent but much welcome conversion to the concept of limiting auditors' liability proportionately and by contract. Until recently, 
 according to last December's DTI consultative document on director and auditor liability, the Government believed that the adoption of proportionate liability 
''would need to be part of a major reform of the law of negligence''.
 As a result, the Government's consultative document concentrated on forms of monetary capping rather than examining proportionate liability. Despite having explicitly ruled out in the consultative document reform permitting proportionality, a large number of respondents nevertheless volunteered their view that this was the solution they most favoured. Indeed, it may be the widespread support for proportionality, which is evidenced in the responses to the consultative document, that has led to the Government's new-found enthusiasm for proportionality. Whatever the reasons for the Government's conversion, it is, as I say, most welcome. 
 The current system of joint and several liability, which I set out in some detail a moment ago, allows the claimant to sue any party that has contributed to their loss for the full amount of the loss, regardless of the extent to which that party was directly responsible. It is, of course, then open to that party to sue all the other people who might have contributed to the loss, but the first party has no redress if those people have no money. 
 To illustrate this point, let us consider another example—the situation between Equitable Life and Ernst and Young. I should stress at this point that I have no direct knowledge of this case, but I understand that the board of Equitable Life is suing Ernst and Young for £2.4 billion. I do not know whether Ernst and Young was negligent in its work, but even if it was it is inconceivable that it and it alone is responsible for the total loss suffered by the poor policyholders at Equitable Life. Quite properly under current law, however, the board might be intending to sue Ernst and Young as if it were the only party involved. I imagine that the board are doing so because they perceive Ernst and Young to have the deepest pockets, but the chairman of Ernst and Young has publicly stated on many occasions that a judgment against his firm in favour of anything even remotely approaching such a sum would bankrupt it. 
 Let us consider what would happen if Ernst and Young, or another firm in the same position, were bankrupted. First, the policyholders at Equitable Life would probably end up with far less than they would if Ernst and Young continued in business simply because there would be many other creditors and no future income out of which to pay them. Secondly, the 7,000 people employed by Ernst and Young in the UK would lose their jobs, and the 400 partners would lose their jobs and their capital. Some of those people would no doubt obtain lucrative employment elsewhere, but many others would not. 
 In no way do I ignore the current consequences for Equitable Life policyholders, nor the future consequences for the employees and partners of firms such as Ernst and Young, but of greater significance is 
 the bankruptcy of the big four, which would be a disaster for the UK. The big four would become the big three, which would restrict still further the choice of auditor available to our largest global companies. 
 All the clients of one of the big four that went down would have to find a new auditor, but it cannot be assumed that either the remaining big three or the next tier of audit firms would necessarily want to take on all the clients of the largest auditor. The shockwaves from the collapse of a firm of the size and stature of one of the big four would make the remaining firms even more risk averse, and it seems almost inevitable that some companies in the riskier segments of the marketplace would end up without any auditor at all. 
 As I say, this would be a crisis for the UK, and the Government would have the task of trying to find a solution. It would not be possible to create a new global firm, either by dividing the remaining big three in half or by forcing some mid-tier firms to merge. Neither route would create a new global audit firm with the global reach, specialist skills or ability to invest in the new technology necessary to audit the largest multinational companies that make up the FTSE 100. I submit that the Government would have to introduce liability reform if there were to be any hope that the remaining big three and the mid-tier firms would take on those audits that they would otherwise reject. It is never easy or sensible to legislate in a rush. Rather than introducing reform in the midst of a crisis, it would be far better to do so now, before the crisis erupts. 
 Permitting auditors to limit their liability by reference to proportionality does not remove financial risk from the audit firms. They would still be liable for any loss or damage caused by their actions. The Minister made it clear earlier that she regards that as important, and so does the Conservative party. Furthermore, proportionate liability does not guarantee the survival of any particular audit firm. In an extreme case, the loss caused by a firm's negligence could be greater than its financial resources. However, proportionate liability would reduce significantly the likelihood of a catastrophic corporate failure bankrupting an audit firm and, at the same time, make it far more attractive for some mid-tier firms to compete more vigorously for the audit of companies in the FTSE 350, if not the FTSE 100. I am amazed that the suggestion was made in the Office of Fair Trading report on such matters that uncapped liability could in some way attract newcomers to the market. 
 For all those reasons, new clause 3, which would permit auditors to limit their liability by reference to proportionality, has a great deal to commend it. I hope that the Government will accept the principle of the new clause and table an amendment on Report. 
 I offer new clause 4 as an alternative approach to dealing with the issue. Although the Secretary of State has ruled out introducing a cap, she had concluded in favour until she learnt of the Chancellor's strong opposition. The OFT report confirmed that a cap set at an appropriate level would not be anti-competitive, so any cap would have to be set by the Secretary of State or by another party with delegated authority, 
 such as the Financial Reporting Council. That would be necessary to ensure that the cap was set appropriately. 
 In new clause 4 I have set the limit at 20 times the UK audit fee, although I am not wedded to a multiple of 20—some have argued that the figure is too high, while others have suggested it is too low. However, I believe that it represents an appropriate level, high enough to provide proper redress when something has gone wrong and low enough to reduce significantly the possibility of a large claim driving one of those auditors under. 
 There are not many areas in our corporate sector where providers of goods or services will be subject to a penalty of 20 times the value of those goods or services. Sometimes a single failure at a particular moment gives rise to the audit failure. More often, the matter has arisen over months, or occasionally years, and it is necessary for that purpose to regard the failure as what I believe the insurance market calls a single event. In other words, if the auditors fail to detect a fraud that begins in one period of account and is detected in a later period, the auditor's liability is limited to 20 times the average fees paid to it in the years in question. That is an important principle if we are to avoid double counting, which is why new clause 4 is framed as it is. 
 New clause 5 is similar in concept to new clause 4, except that it would impose a single monetary sum to be applied to all companies of £75 million. Instead of a multiple of the fees, there will be one figure of £75 million. That figure was suggested by some of those responding to the Government's consultative document and I am persuaded by the logic used in those answers that £75 million is not an unreasonable figure. One of the big four said in its submission: 
''For all but the very largest companies, losses arising from an auditor's negligence are very unlikely to exceed this amount so such claims would effectively not be capped. For the very largest companies, which give rise to risks of loss greater than £75 million, it is appropriate that they should carry the excess risk themselves. We . . . believe that a statutory cap at this level will improve the likelihood of mid tier firms taking on larger audit engagements, thereby increasing choice in the marketplace''.
 The Government have made it clear that they expect any limitation of auditors' liability to be such that it promotes competition. I can certainly see that a cap above £75 million would be so far in excess of the ability of a mid-tier firm to meet an award of damages against it of that figure that it would do nothing to encourage it to compete for the larger audits. Indeed, even for the big four, a settlement of damages much above that figure could be met only by that firm mortgaging its future. 
 The inevitable consequence is that the firm would become unattractive to potential new partners—and to many of its existing partners. In the long term, such a settlement would inevitably lead to a terminal decline. The firm's ability to invest in new technology and in the development and retention of its people would also be severely damaged. This would not be in the interests of competition or of preserving high-quality audit, which themselves depend on having high-quality people as audit partners and audit managers. 
 New clause 6 is the simplest and the most deregulatory. It would permit a company to enter into a contract to limit liability with its auditors, provided that the contract was approved by the shareholders at a general meeting. In other words, it would return us to the position before it was changed 75 years ago, but with the crucial added ingredient that the arrangement would need to be approved by the company's shareholders. 
 Requiring that a contract to limit auditors' liabilities should be approved by shareholders at a general meeting would meet the abuse that gave rise to the provisions in the Companies Act 1929—namely that the directors and auditors were conspiring to enter into cosy contracts to limit their liability. That fact became known to the shareholders only after a loss had been suffered, and an action was launched against the directors and auditors. Some may argue that the 1929 Act would have been better had it simply required such contracts to be approved by the shareholders. However, 75 years later, in a radically different, more litigious but more transparent time, we can now ensure that a contract can be effective only if it is visible to and approved by the shareholders. 
 New clauses 7, 8 and 9 mirror new clauses 3, 4 and 5, except that they would impose the limitation by statute, whereas the latter are permissive and would allow companies to limit auditors' liability by contract if the shareholders so wished. 
 New clause 10 would combine the benefits of proportionality with those of a cap. It takes a belt and braces approach that combines the equity of proportionality with the safety net of a cap to guard against a catastrophic claim. 
 We have submitted eight new clauses to the Government as we are a good and constructive Opposition; my hon. Friends and I are helping the Government. I have no vanity of authorship, and I am happy to be corrected by the phalanx of skilled draftsmen and officials that doubtless serves the Minister so well. 
 I briefly draw the Minister's attention to the fact that other countries are addressing or have addressed the problem. Austria and Germany have opted for a fixed cap, the subject of one of the new clauses. On the other hand, Greece has opted for a multiple of fees. I believe that proportionate liability is being established in Australia, and it is certainly established in a number of states in America. Contractual arrangements between auditors and their clients, the subject of another of my new clauses, have been established in Holland, Denmark, Spain and Luxembourg. 
 Everyone agrees that this is a serious problem for auditors; more importantly, however, it is a problem for the UK corporate sector. The Government have a duty to act now, before disaster comes upon us. Let the Minister tell us today that she will carry out her duty to the corporate sector in Britain by accepting one of my new clauses or coming back with a measure on Report. That would remove a serious and systemic danger that could affect not only corporate Britain, but the pensions and savings of millions of our fellow citizens.

Derek Conway: Order. Some Members are looking at the annunciators and wondering what is happening. Before I call the next speaker, I advise the Committee that the House of Lords will observe a minute's silence at 11 am in memory of those who were murdered in Beslan. Mr. Speaker would like Westminster Hall and those Committees sitting at that hour also to observe a silence. I gather that silence is being kept in Departments and Government offices throughout the country. The Committee will therefore understand that I shall suspend the sitting at 11 am for one minute.

Ian Taylor: I declare my directorships of some public and private companies; they are in the register. I have no interest in any firm of auditors, except that I chair the audit committees of one or two companies and therefore I am well aware of the problems of auditors and their fees. If I may start with that point, it is increasingly difficult for companies to negotiate sensible fees, particularly for operations that cover a wider area than the United Kingdom, simply because the auditors are beginning to try to cover themselves for what they consider liability. The cost of auditing companies is inevitably going to rise, particularly if no cap or other edifice is put in place to limit their ultimate liabilities.
 I am delighted by the ingenuity of my hon. Friend the Member for Sutton Coldfield—clearly there has been inspiration from me, because my name is attached to a vast number of amendments, which he consulted on with me in detail—and I commend that choice to the Minister as this is an urgent issue. We are beginning to see some real difficulties for firms that cross countries. The big four, by definition, cross countries, but the second-tier firms are also having difficulties. I am not making any allegations, but I would worry if structures were put in place to try to protect auditors from liabilities simply because they move across countries. 
 Recently, in the Parmalat case in Italy, a company known as an auditor in this country, Grant Thornton, was pursued by the liquidator of Parmalat. I am not making any allegations, but I am drawing attention to the case as the sums involved are considerable. It is tempting for the liquidator of a company to go to the auditors for the largest possible amount, however unrealistic. We are also seeing such problems in the United States. There are also problems where one auditor may be the lead auditor, but other firms are auditing in different countries. Where does liability apply? 
 In addition to the multiple choices faced by the Minister in the new clauses, has she thought of trying to gain a European Union solution? That would not solve the global problem, but it would begin to make some rational attempt to find a solution in the EU. More and more companies are trading across the single market, which now consists of 450 million people in 25 countries.

Peter Atkinson: Is the implication of the Parmalat case that if such a case occurred in a country such as Greece, where caps have been introduced, and the auditing firm was represented in all countries, the
 claim would be pursued in the United Kingdom because there was no cap? Would that attract such claims to the UK?

Ian Taylor: From bitter experience and from having been a DTI Minister, I am careful not to try to second-guess the lawyers or to give a hint as to how they might pursue cases. However, it might be possible to pursue the weakest link in the chain in the EU. If the weakest link happened to be the open-ended liability of a UK partnership, even if it had some construct abroad as a limited liability partnership, it may be that the British partnership would be pursued for something that took place in another country.
 I am careful not to get into any legal problems that Grant Thornton might have about the Italian case at Parmalat, because I do not know the case. I am drawing attention to the fact that big money is involved and that it is one of those firms of auditors in the second tier, which need to grow so that we are not dependent merely on the big four. 
 Another worry is the stability of the partnerships if we do not move to something proportionate. In many cases, auditors are the ultimate description of unlimited liability. They require extensive capital, and are increasingly going to require even more. The auditing profession is, as my hon. Friend the Member for Sutton Coldfield said, vital for corporate governance and the ability of the corporate sector to work in this country. I would not want further pressures to be imposed on firms of auditors, which might limit them with respect to their decisions to carry out audits. I want them to be more constructive and international, and I want the second-tier firms to grow. 
 Having explained my concerns, I endorse all the proposals standing in my name, largely because I shall be fascinated to see which the Minister will choose. I agree with my hon. Friend that the generosity of spirit on these Benches is remarkable. All that the Minister needs to do is point to one of the proposals.

Michael Moore: I begin with what is probably more of a confession than a declaration, in that I am a member of the Institute of Chartered Accountants of Scotland. I should stress that I receive no remuneration for that; quite the other way round. I seem to pay a large chunk of my salary into its coffers to maintain my membership.
 The issue that we are discussing has been contentious for as long as I have been involved in the profession—since 1988. At that stage I had a choice—if I wanted to be part of the mainstream and work in one of the largest firms—of nine audit firms. One of those is now bust, and most of the others merged so that we are left with the big four. The firm of which I was a member, Coopers and Lybrand, is now submerged in one of those remaining four. 
 What we are concerned about in this debate has, as other hon. Members have made clear, been an issue for decades. It is not new, and the law changed in the early part of the previous century to overcome fairly rampant abuses. Whenever there is a company failure, one of the first questions that people ask is, 
 where were the auditors, what were they up to and why did it happen? 
 Sadly, rather a lot of case history now suggests that, over time, some auditors have been negligent and in breach of their duties. It is therefore a fair cry to ask what they were about and to seek recompense from them for the loss that others have suffered. However, it has never been entirely clear who is able to sue the auditors and who is not. To whom do they owe their duty of care? 
 That debate has come and gone over the years. There has been an attempt in recent times to improve clarity about the responsibilities of the auditors. There is now much better disclosure than when I was in practice as to the respective responsibilities of company directors and auditors. However, none of that has really ended the feeling that when someone is in trouble they should have a pop at the auditor. 
 I emphasise that I do not for a minute suggest that when an auditor has been negligent or in breach of his duties he should be protected from the consequences. The hon. Member for Sutton Coldfield was careful to make that distinction as well. However, if we look to the accountancy profession to continue to play not only an important role as a service provider to business, but a wider role for the good of the economy, it is also important that it should not constantly be put in jeopardy by the risk of ceasing to trade as a result of a court action. As the hon. Member for Esher and Walton (Mr. Taylor) pointed out, court actions are many and varied and seem to increase in number each year. 
 I welcome the Conservative proposals, although I have not dealt with multiple choice since some of my early tax exams. I shall be interested, like other hon. Members, to hear the Minister's response. My preference is, I think, new clause 3. Where it is possible to limit the liability by proportionality and agree that by contract, that is a good way forward. 
 As the hon. Member for Sutton Coldfield emphasised, it is crucial that there is a lock, so that shareholders must endorse agreements. Sadly, there has been evidence of collusion and connivance at the fringes between auditors and managers, although I would not suggest that that is the mainstream experience. Clearly, we must not allow that to continue. Shareholders must be aware of, and indeed approve, any agreement. 
 I am less keen on the other options. The hon. Gentleman made it clear in speaking to the new clauses that he had consulted on the multiple of 20 times the fee and included it for the sake of a good discussion. I respect that. Inevitably, however, the problem with any multiple is that it will appear arbitrary and prescriptive and will not allow things to vary with the circumstances. I have similar concerns about the £75 million cap. He was careful to say that it would not put off mid-tier firms, but I would be interested to hear their reaction, because it seems like quite a large amount for them. 
 If we did not already know that there was a problem, the market would be communicating the fact to us quite clearly. The fact that there are only four 
 major auditing firms left with the international spread and breadth of experience needed to deal with the largest companies in this land—the FTSE 100 and other indicators tell a very stark story in that regard—should be a warning to us all that there is insufficient competition in the marketplace. 
 The flip side to that, as the hon. Gentleman said, is that there is no provision to limit auditors' liability by contract and no insurance for that purpose available in the market. So this is a very fraught area; indeed, any area where insurers fear to tread must be very dangerous, because they are pretty happy to insure a lot of other extremely dodgy things. The fact that they are unwilling to insure poor old auditors suggests that auditing firms live in a slightly different world. 
 The Minister has been very open this morning, and I hope that she will disclose the thinking that has gone into the Government's position and give an indication of which of the many options she prefers. Perhaps she will put to bed all these terrible rumours that have done the rounds about a bust-up between the Department of Trade and Industry and the Treasury. Apparently, the Bill would have introduced liability caps but for cold feet at the Treasury. 
 It is important to know where we are and how we go forward. I hope, therefore, that the Minister's remarks and the Bill will give some impetus to the lively debate that has been taking place in all business circles so that the issue is not simply kicked into the dusty reaches of the DTI or the Treasury to be ignored for another few years.

Jacqui Smith: Before I deal with the detail of the new clauses and respond to hon. Members' points, perhaps I can assist the Committee by saying something, as the hon. Member for Sutton Coldfield did, about the historical context in which we need to consider auditor liability.
 As is self-evident from this morning's exchanges, the debate on Second Reading and the considerable discussion that has taken place in the profession and in business more broadly, some of which has been reported in the press, this is a complex issue and there are many different perspectives on it. Auditors have understandable concerns about their position, although I accept the hon. Gentleman's point that our concern needs to be the contribution of effective audit to the development of trust, transparency and better financial reporting in corporate Britain. Nevertheless, the auditors have argued their case strongly. 
 Investors' interests are arguably different from those of auditors. We should not forget that, as the hon. Gentleman spelled out, the statutory requirement for a company to have an audit is designed to protect investors by providing independent verification of the accounts prepared by directors, and that the prohibition on limiting auditors' liability was introduced in 1929 precisely to prevent collusion between auditors and directors. 
 The relationship between auditors and directors is a difficult one because on it depends the veracity of, and emphasis that can be placed on, accounts. It is therefore important that any change to the law 
 should avoid unintended consequences—not only the reappearance of the kinds of abuse that the legislation was originally intended to outlaw, but unintended consequences in respect of those who would gain from or lose by such a change. As I said on Second Reading, we need to be very clear about the objectives of any reform. Our key objectives must be to ensure first, that businesses continue to have access to a complete market for high-quality audits; secondly, that we continue to improve the overall quality of the audit, in line with the function of part 1 of the Bill; and thirdly, that we maintain competition in the audit market. I recognise the point that the hon. Member for Tweeddale, Ettrick and Lauderdale (Mr. Moore) made about the emerging concentration on the audit market. We are concerned to maintain and enhance the competitive environment. 
 The Government take seriously the issue of audit liability. The auditors lobbied for partnerships to be able to limit their liability in the way that companies do, and the Government responded with the Limited Liability Partnerships Act 2000. We have had a good three years' experience of LLPs and the form has proved popular. By the end of March 2004 there were approximately 7,400 LLPs on the register, including the big four auditing firms. LLP status protects individual partners by limiting their liability to the amount of their stake in the LLP. However, it does not, and was never intended to, protect a professional person against individual liability for negligence; nor does it protect the firm from liability. Rather, it protects each partner from joint and several liability for any failings of his or her partners. 
 The Government then initiated the company law review, which specifically considered auditors' liability. The review looked in some detail at the role of audit, including the question—raised by the hon. Member for Tweeddale, Ettrick and Lauderdale—of who could rely on the accounts. Following two rounds of consultation, it recommended reform of section 310 to allow auditors to limit their liability, subject to disclosure and shareholder approval. It also proposed that formal guidelines—to be set in secondary legislation—be drawn up on the extent to which auditors should be permitted to limit their liability, but it did not indicate what they should be. Rather, it suggested that further work was necessary.

Andrew Mitchell: The Minister will note that one of the galaxy of propositions that we put before her deals specifically with what the company law review said. I am sure that she is right about additional secondary legislation; of course, if the amendment in question found favour with her today, it ought not to be too difficult to frame the necessary secondary legislation and bring about such a change quickly.

Jacqui Smith: The point of my argument is that although a strong case has been made for reform and the CLR recommended that further work needs to be done, the detail concerning what needs to be done is less clear. As I suggested earlier, there are objectives that we need to bear in mind and unintended consequences associated with some of the proposals
 that nobody would find satisfactory—for example, the detail concerning the ways in which auditor liability might be capped.
 Having explored the option with a variety of interested parties following the company law review, the Government have concluded that the difficulties in framing the guidelines are considerable. However, we now believe, as my right hon. Friend the Secretary of State set out in last week's statement, that some form of proportionate liability might provide a more workable long-term solution. 
 That brings us to the nub of the problem as outlined by the hon. Member for Sutton Coldfield: joint and several liability. The auditors argue that they are often only partially at fault, but can be sued for the whole loss because they have deeper pockets than, for example, individual directors; indeed, that was the argument put forward by the hon. Member for Sutton Coldfield. The principle of joint and several liability applies much more widely than in the field of auditing and has been frequently re-examined. On three occasions in the past 10 years, the question of whether our country should adopt a proportionate liability system has been considered and rejected. In other words, although the argument that we could reform the principle of joint and several liability is straightforward, such reform would have far-ranging consequences for the basis of liability in law in this country. 
 However, as my right hon. Friend the Secretary of State said in a written statement on 7 September, we are prepared to consider a change to company law to allow a system of proportionate liability via contract between companies and their auditors, provided that all the parties involved can agree that such a system is desirable and workable. I will say a bit more about that possibility in a moment. 
 Before doing so, it would be useful to describe the consultation exercise that we launched in December 2003, which sought evidence on the present position and ideas for practical, workable and effective future solutions. We received more than 120 responses from a wide cross-section of people. As I undertook on Second Reading and as we discussed earlier today, I have placed a summary of the responses to the consultation in the Libraries of both Houses. In addition to exploring auditors' liability, the consultation invited respondents to consider questions about auditors' duty of care. It asked whether they were convinced by the key arguments for change put forward by the auditors, and for their views on possible reform options. I will deal briefly with each of those areas in turn. 
 The consultation asked respondents to consider whether auditors' duty of care—an issue raised by the hon. Member for Tweeddale, Ettrick and Lauderdale—should be extended to individual investors in a company, to potential investors or to any other group. Currently, the duty is limited to the shareholders as a whole. Historically, this has been a question of balance; since the duty of care was narrow, it was argued that there was less need to limit liability. 
 The overwhelming majority of respondents were opposed to the auditors' duty of care being extended beyond existing boundaries—for example, to potential investors. Respondents were also opposed, by a majority of about three to one, to extending the ability to claim to any other group. In view of the comments expressed and having taken note of the company law review's recommendations, the Government have decided not to introduce amendments to extend auditors' duty of care. 
 I turn to to the case for reform of auditors' liability. The hon. Member for Sutton Coldfield, in tabling these new clauses, appears to accept the auditors' case for reform of the law.

Andrew Mitchell: The Minister referred to my accepting the auditors' case for reform. I do accept that case, but will she at least acknowledge that the case we have put with some vigour this morning concerns not auditors but the good governance of the British corporate sector and the interests of investors, savers and those who look to the markets for the quality and size of their pension? It is a matter not just of the needs of auditors but of the good governance of the corporate sector, and it is right to look to the Department of Trade and Industry—the Department charged with that duty—to ensure that that happens.

Jacqui Smith: I accept the hon. Gentleman's argument, which is in line with what I said earlier. We need to keep in mind the broader picture and our overall objectives when considering the reforms. Those objectives are to ensure that business continues to have access to high-quality audits because of their importance to good corporate governance and financial reporting; to ensure that we continue to improve the quality of audit; and to maintain competition in the audit market. We need to judge the options for reform against those objectives.
 There are two stages to the argument—acceptance of the issue, and the detailed reforms that might address the issue—and it is worth discussing the scale and nature of the problem before we consider the detail. Auditors have argued—the argument has been repeated by the hon. Member for Sutton Coldfield today—that there is insufficient commercial professional indemnity insurance available to the big four auditors compared with their scale of exposure. Consequently, the firms themselves are left carrying considerable uninsurable risk at a time when the claims environment is worsening. 
 It appears that that the number of companies prepared to insure the big four firms has fallen dramatically, and that such insurance is more expensive to obtain and is being sold with increasing numbers of exclusions. However, although the theoretical liability of auditors is unlimited, in practice claims appear to be settled for amounts that can be covered by insurance. The hon. Member for Sutton Coldfield identified some large claims, but the evidence concerning settlements shows that the largest settlement in the UK totalled some £75 million. The consultation shows that most auditors, including many in the second tier of firms outside the big four, are able to secure cover for up to such an amount. 
 If the cost of insurance were increasing dramatically, one would expect that to be reflected at least to some extent in audit fees. Based on his experience, the hon. Member for Esher and Walton argued that audit fees are increasing. There is some evidence of that, but it is not completely consistent. Of the 82 companies that were members of the FTSE 100 in both 2000–01 and 2001–02, audit fees were increased for only 40. Fees remained unchanged for 22 companies and actually dropped for 20. That does not seem consistent with the proposition that liability insurance premiums are increasing rapidly. The evidence is not completely clear-cut. 
 The Committee observed one minute's silence in memory of those killed in Beslan in Russia.

Jacqui Smith: I was about to move on to discuss the international situation, and whether an easy answer to the problem could be found by looking at international experience. As the hon. Member for Sutton Coldfield partly identified, one of the interesting things about the international experience is that there is a difference of approach. Some countries, such as Britain, are examining the issue in the context of a worldwide campaign by audit firms on liability. Some countries have already changed their law. However, there is no global consensus that the liability of auditors should be limited.
 To illustrate that point, in the European Union there is no common view on the most appropriate way forward. Although some countries allow liability to be limited, at least eight members of the EU do not. Furthermore, there is no agreement on whether a standardised approach should be adopted. The EU is looking closely at what we do in Great Britain, because there is no common view. 
 The hon. Member for Esher and Walton, in line with his views on Europe, saw the European Union as the solution to the problem. Although I share many of his attitudes towards the EU, I am not convinced that, given the discrepancies in different member states, it offers the most appropriate way to solve the problem. However, I am sure that he is reassured that the current negotiations on the eighth company law directive are focusing on what it is possible to do at European level to ensure that there are consistently high standards of audit quality across Europe.

Ian Taylor: For the Minister's benefit, I must point out that although I am a positive European, I do not regard the European Union as a panacea. However, bearing in mind the consistency across the EU with the opening up of investment and financial markets, it is increasingly important that there be more consistency on this aspect of the treatment of auditors. They are obviously the basis of good governance of financial markets, because investors rely on their opinions. We should, through the Minister, try to get some basis of agreement across the EU.

Jacqui Smith: I hear what the hon. Gentleman is saying. As I said, the focus in Europe is, rightly, on ensuring a consistently high standard of audit quality, and that is what we are pursuing in the negotiations. In relation to America, as the hon. Gentleman says, there
 have been various approaches. Australia has changed its laws to permit proportionate liability, but New Zealand has rejected a similar option. The point of my argument is that there is no international consensus. There is no simple magic bullet that the Government could use to solve the problem. We must therefore look to our system, our history and our objectives to determine the best approach.
 Finally, the auditors argued that there was a risk that the number of major accountancy firms capable of bidding for the audit of a major public limited company might fall below the minimum appropriate to maintain competition, as some of the big firms might decide to cease providing audit services. The Government are concerned about having received representations from some large companies worried that if one of the big four were to fail, there would no longer be sufficient competition in the provision of audit services. 
 We are anxious to ensure that companies requiring an audit can get one. However, although we spelled out that objective at the start, a respondent to the consultation commented: 
''We do not believe it likely that one or more of the major accountancy firms will voluntarily decide to cease providing audit services in the UK, given the effect this would have on their global networks and the apparent importance of their audit clients to their other sources of revenue.''
 The evidence on that point is not conclusive, but I accept the argument that the competitive environment within which audit is offered is important, and that we therefore need to have such an objective. 
 The auditors obviously want to present their strongest case, but the Government have a duty to examine those claims, particularly as they were not supported unanimously. The auditors may have lobbied the Government strongly, but they have been less assiduous in persuading other stakeholders of their case. As I suggested, responses to the consultation tended to come from a particular perspective and did not take account of the differing interests of others. That is why the Government decided to take the lead. We have brought together all the parties involved, to see whether we can come up with a joint approach that meets all the concerns of the various parties, as well as the Government's objectives of ensuring that companies can readily obtain audits, of improving the quality of audit and of improving competition in the audit market. 
 In order to test more closely the effect that limiting liability would have on competition, the Government asked the Office of Fair Trading to report on the effect that a cap would have on competition between auditors. As indicated in the statement of 7 September, the OFT considered that a limit on liability would be neutral as regards competition, and would not significantly enhance it. 
 The Committee will have gathered from what I have said that the responses to the consultation did not set out an overwhelming or universally accepted case for urgent reform. Nevertheless, the Government have repeatedly placed the maintenance and improvement 
 of audit quality at the forefront of corporate governance and the business agenda. We are committed to keeping audit quality and liability reform under review. 
 It is against that background that I turn to the ingenious set of eight new clauses tabled by the hon. Member for Sutton Coldfield. As he said, they are designed to test all the main options—a freely negotiated cap on liability, a fixed sum cap, a cap that is a multiple of the audit fee, and proportionate liability. They present each possibility as an option for companies and auditors, subject to the consent of shareholders, or as a universally applicable solution. 
 I shall start with new clause 6, because it is the simplest. It proposes removing auditors from section 310 of the Companies Act 1985 and allowing them to negotiate limited liability with their clients, free of statutory constraints and subject only to shareholder agreement to any proposed limitation of liability. The consultation considered a similar option. Just over half of the respondents to that question opposed the proposal, mainly because they were unconvinced of its merits; however, some opposed it as a matter of principle. 
 In particular, some respondents were concerned that a limit on the auditors' liability could undermine their duty of care. Other respondents were concerned about the level of such a cap. One major company commented: 
''If the cap is left to individual negotiation, lack of competition would probably mean that the audit profession will push liability caps down over time.''
 A representative body said that 
''companies would be in a very weak bargaining position, particularly where only a very few firms would be capable of conducting the audit of where there have been past issues arising out of the audit''.
 Another wrote: 
''We would be concerned by any approach whereby auditor liability was determined by individual negotiation and then subject to shareholder approval as this would be very difficult to operate in practice.''
 Personally, I am less convinced that gaining shareholder approval is difficult. 
 The Government agree that shareholders have the clearest interest in any limit on the liability of auditors, but any mechanism for ratification must ensure that the company is not left without an auditor. So there would be a question about the situation before that agreement was secured. 
 The Government have listened to the responses to the consultation, and reject the approach in new clause 6 because it could lead either to reduction in liability to an unreasonable level or to companies being unable to secure their shareholders' agreement—

Paul Farrelly: Does the Minister agree that if caps were driven down to an extremely low level by lack of competition, that would simply increase the potential for moral hazard, in the sense that auditing firms might take the attitude that because their liability was limited with regard to a particular company, they did not need to pay as much
 attention as they should to the activities of rogue directors?

Jacqui Smith: My hon. Friend makes the extremely important point that we must create a balance between the necessity for there to a consequence as a result of faulty audit, and the argument that that consequence should not be so extreme that it knocks out the audit firms. He rightly identifies that balance.

Andrew Mitchell: The Minister's argument is a red herring—an elegant one, but a red herring none the less. Who says that the cap will be driven down? The new clause would empower the Minister to set the cap, which she can raise or lower. The important point is that that power rests with the Minister. The point about how a lower cap could equal moral hazard is clearly right, but the resolution of that rests in her hands.

Jacqui Smith: That power does not rest in my hands in the case of new clause 6, which the hon. Gentleman himself described as the most deregulatory. In other words, lowering the cap would happen solely through negotiation. That is my concern about new clause 6.
 New clauses 4, 5, 8 and 9 share the common goal of imposing or enabling agreement on some form of ceiling to the liability of auditors within the confines of section 310. Just over half the respondents opposed this proposal. Those who opposed the reform generally did so as a matter of principle. The key issue would be the need to find an appropriate framework that is equitable for, and is seen to be equitable by, all the differing parties dependent on the audit process. What the market might view as a bare minimum, the auditor might see as onerous. What the auditor might view as equitable might severely restrict the rights of others. The point of principle is whether it is possible to set a level of compensation that is fair to all. 
 Let me illustrate the difficulties posed by new clauses 4 and 8. These clauses would restrict, or permit restriction of, any liability to a figure of 20 times the audit fee. A limit set as a multiple of the audit fee has the merit of making the limit proportionate to the audit fee and, very broadly, to the turnover of the company, but it is an essentially arbitrary figure and will have arbitrary results. Audit fees for the largest FTSE 100 companies are well over £10 million, so under new clauses 4 and 8, their auditors' liability would be over £200 million. At the smaller end of the FTSE 100, however, are companies with audit fees of £500,000 or less, where the auditors' liability would be no more than £10 million. Linking the limit to the audit fee takes no account of the actual loss that shareholders might suffer if the auditors were negligent. 
 If there were 500,000 shareholders, which is by no means an unrealistic figure for a FTSE 100 company, and compensation was capped at £10 million, that works out at the equivalent of £20 per shareholder. At one extreme, therefore, this approach can result in liability at levels that auditors tell us they cannot afford, while at the other, investors could be compensated only for a very small proportion of the loss that they had suffered because of the auditors' 
 negligence. Moreover, that problem cannot be addressed simply by changing the multiple, because it is self-evident that what improves the position at one end of the scale makes it worse at the other. 
 A further concern is that a limit based on the audit fee would create an incentive for auditors to keep the audit fee as low as possible. At first sight that might seem a good thing, but some of the largest firms have been accused by their smaller competitors of ''low balling''—bidding low for audit work and using it as a loss leader to gain other more profitable work, such as consultancy. We considered the option carefully, but, like the majority of respondents to the consultation, we concluded that it is wrong both in principle and in practice. 
 New clauses 5 and 9 would be even more arbitrary in their effects than the new clauses that propose a limit based on a multiple of the audit fee. Under new clauses 5 and 9 the auditors' liability could be limited to £75 million. Such an approach gives rise to serious concerns about competition. As the hon. Member for Tweeddale, Ettrick and Lauderdale pointed out, there is a huge divide between the big four audit firms and the next tier—the so-called class-A firms. 
 Some class-A firms have told us that a simple limit, fixed at a figure such as £75 million, would benefit the biggest firms but do little or nothing for some of the smaller and medium-sized firms that risk being wiped out by a claim at such a level. It would entrench the current position and do nothing to enhance competition in the audit market. Again, it would mean that compensation for investors could be limited in a way that would take no account of their loss. That option does not have the unanimous support of the auditors, let alone investors, so we cannot agree to it. 
 That brings me to new clauses 3, 7 and 10, which are all based on the concept of proportional liability. As I have made clear, the Government see some attractions in the approach, but it raises many questions, which we need to work through with companies, auditors and investors. The fundamental point is that if the auditors pay only a proportion of the loss, either someone else must pay the rest, or the victim—in effect, the shareholders—will not be fully compensated. We need clarity on that point. 
 Many other issues need to be considered. We must not forget that the fundamental reason for an audit is to provide independent assurance to the shareholders that the company's accounts are reliable. Some people would say that if the auditors have been negligent, they have failed 100 per cent. in their task, even if someone else has also failed. 
 We also need to be clear about the effects on third parties of a limitation on liability achieved through the contract between the company and the auditor. Let us suppose, for example, that a company had obtained an independent valuation of assets from a third party, and that that valuation was negligently accepted by the auditors and reflected in the accounts, but subsequently turned out to be seriously overstated. If the company sued the valuer for the loss, the valuer might, depending on the circumstances, be able to 
 obtain a contribution from the auditor. That contribution would not be limited by the contract between the company and auditor. If the purpose of limiting liability is to prevent the catastrophic collapse of an auditor, the new clauses would not necessary achieve that end. 
 In the light of the response to the consultation, it is too early to conclude definitely that reform of the kind we have been considering should be undertaken. The answer might lie in the direction that we have been exploring, but further work needs to be done. New clauses 3, 7 and 10 raise more questions than they answer, because they run together contract and tort, and they also run together the contribution between two or more liable persons and the contribution between company and auditor. 
 We are not leaving matters there, however. We made clear in the statement our commitment to improving the operation of the audit market. We shall continue to consider any proposals, including the possibility of permitting the limiting of liability on a proportionate basis by contract, if that can be shown to enhance competition and improve quality in the audit market. Officials from my Department will be holding an initial meeting with stakeholders on this issue tomorrow. That will be an opportunity to identify the issues, although I have no doubt that further work will be needed—particularly on the question of the effectiveness of the reform and whether it will do what needs to be done. 
 There are many issues to consider, including whether a reform of the kind that is contemplated would significantly enhance competition and improve quality; whether the auditor's clients would be prepared to accept or negotiate a limit to liability; what the consequences of contractually agreed limits between the auditor and the company would be for third parties, if they had not been party to the negotiation or agreement; and whether any other party would be significantly disadvantaged as a result of the proposed change. 
 The issue is too important to be rushed. The consequences of an ill-thought-out change to the law could be much worse than the status quo. I therefore urge the hon. Member for Sutton Coldfield to be a little patient and await the results of discussions with stakeholders. That is the best way to achieve a workable solution acceptable to everybody concerned.

Andrew Mitchell: That was an extremely disappointing response. Had I not given my word to the Government Whip that I would not put the matter to a vote, I would be tempted to test new clause 3, given the support that I received from the other end of the Opposition Front Bench. As he will discover, however, even an ex-Whip's word is his bond.
 I am grateful for the Liberal party's welcome for new clause 3. I am also grateful for the words of my hon. Friend the Member for Esher and Walton, who made several important points based on his experience. On his point about the European Union, 
 I have been reading a paper by Paul Davies, who sat on the company law review committee when it dealt with post-Enron developments in the United Kingdom. Had I time I would quote from that paper, because it explains how the law on this issue is developing in terms of European Union coverage. 
 I am staggered that the Minister has said that we need more time, and that she will consult further. She rather cleverly went through all my different options, explaining that none of them entirely found favour with everyone. However, to govern is to choose, and the Minister should choose a solution to this important problem. Let us not beat about the bush: we all know that the DTI recognises the importance of taking the matter seriously and of taking action, but it has been constrained by the Treasury. So much for the Government's long-standing and much heralded support for joined-up Government. The Minister and her colleagues must go to see the Chancellor of the Exchequer at the Treasury to tell him that the matter cannot wait for interdepartmental rivalries to be resolved. Indeed, I offer to come with her to help her make her case. 
 This phalanx of new clauses is about the good governance of the British corporate sector, not good living for auditors. As the Minister said, there must be competition in the audit profession, and companies must have access to audits. The new clauses underline those two important points. 
 The most staggeringly complacent argument that the Minister submitted related to insurance. She said that insurance claims are often nothing like as high as we read in the press, that £75 million should cover things and that there was £75 million capacity in the market. I do not want to give her a lecture about how the market works, but her point is simply not true. It would be rather like her having a house worth £600,000, and me telling her that £100,000 of insurance was adequate. Her argument is ludicrous, and she must have put it only to check that I was listening. 
 The Government must take a lead. I am disappointed that they have been unable to accept one of my new clauses, so I hope that the Minister and her colleagues will reconsider her comments and accept one of them as the basis for going forward. I hope that she will return on Report with an amendment that has perhaps been redrafted by her extremely experienced officials, and that she will resolve a matter of great importance to the auditing profession and, way beyond that, to good governance in the British corporate sector. Because I cleave to the hope that she will indeed have further discussions and return to the issue on Report, I shall not press the provisions to a vote. I beg to ask leave to withdraw the motion. 
 Motion and clause, by leave, withdrawn. 
 Further consideration adjourned.—[Mr. Watson.] 
 Adjourned accordingly at twenty-four minutes past Eleven o'clock till this day at half-past Two o'clock.